Personal Finance

Canadian Housing: The Bubble Debate

Posted by BCA Research

on Friday, 13 December 2013 17:29

It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view:

Canada-Housing

 

  • Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.

  • Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.

  • Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.

  • High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.

  • Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.

 

The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.

More from BCA: Overweight S&P Materials

The S&P materials sector is well positioned for a positive surprise as the global recovery gathers pace next year, even if developing economies remain laggards.

 

About BCA Research

Founded in 1949, BCA Research has developed an enviable reputation as a world leader in the provision of independent global investment research. Few, if any, firms can match BCA in terms of breadth and depth of its research. The more than 60 research staff focus exclusively on predicting trends in world economies and financial markets. At their disposal they have a vast treasure trove of historical data, covering more than 150,000 series, some dating back hundreds of years – and the firm is well known for its countless proprietary models and leading indicators. Research is provided to financial professionals in over 90 countries through a range of products, services and meetings.

 

 

Who’s the biggest bull on Wall Street?

 

The answer might just be J.P. Morgan’s top strategist.

 

In a note Friday, chief U.S. equity strategist Thomas Lee rolled out his 2014 forecasts with a year-end target of 2,075 for the S&P 500, which is one of  the most bullish calls out there yet.

 

Lee, says the index could gain another 20% in 2014, because the current bull market is acting like a “classic” secular bull market, which is now in its sixth year, and which has historically been very strong. A classic secular bull market is defined as one in which strong investor sentiment drives prices higher. Anecdotal evidence has been pointing to record highs on investor sentiment.

 

29 stocks J.P. Morgan says to consider for 2014

http://blogs.marketwatch.com/thetell/2013/12/13/29-stocks-j-p-morgan-says-to-consider-for-2014/

* Canadian dollar at C$1.0640 or 93.98 U.S. cents
    * Bond prices higher across the maturity curve
    * Fed meeting in view next week
 
    By Leah Schnurr
    TORONTO, Dec 13 (Reuters) – The Canadian dollar was flat
against the greenback on Friday, with the currency expected to
stick to a trading range as investors were wary of taking large
bets ahead of next week’s Federal Reserve policy-setting
meeting.
   
Investors were also continuing to parse Thursday’s comments
from Bank of Canada Governor Stephen Poloz, who said the central
bank is likely to keep interest rates on hold “for quite some
time,” dampening talk that it was edging closer to cutting rates
in order to combat low inflation. 
   
The perception that the Bank of Canada is becoming more
dovish has weighed on the loonie since late October when the
central bank dropped its long-held rate hike bias. Since then,
the Canadian currency has lost more than 3 percent.
   
Poloz on Thursday called that policy change a shift to
honesty rather than dovishness.
   
“All in all, the Bank of Canada’s view is fairly contained
and neutral in retrospect,” said Dean Popplewell, chief currency
strategist at OANDA in Toronto. 
   
The Canadian dollar was at C$1.0640 to the
greenback, or 93.98 U.S. cents, unchanged from Thursday’s close.
   
Markets will remain fixated on what the Fed will decide to
do at its two-day meeting next week, which runs from Dec. 17-18.
Investors are trying to gauge whether the central bank will
start to scale back its bond purchases next week or hold off
until the new year.
   
Recent stronger-than-expected economic data and a budget
deal in Washington have increased speculation tapering could get
under way next week. The Fed is currently buying $85 billion in
bonds a month, which has been a major driver of global markets
this year. 
   
A faster timetable for the Fed is seen as a negative for the
Canadian dollar as the move is expected to reduce risk appetite
and benefit the U.S. currency.
   
Canadian government bond prices were up across the maturity
curve, with the two-year up half a Canadian cent to
yield 1.097 percent and the benchmark 10-year up 16
Canadian cents to yield 2.646 percent.

 

(Reuters) – The dollar dropped from five-year highs against the yen Friday as investors reduced bets on the greenback amid caution ahead of a U.S. Federal Reserve policy meeting next week that may herald a wind-down of its massive stimulus measures.

While market participants in general expect the Fed to pare back its stimulus no later than March, a growing number expect a small reduction in the Fed’s asset purchases from next week. The central bank holds a two-day policy meeting December 17-18.

“The dollar has retraced all its gains against the yen and this is mostly positioning ahead of the Fed meeting and profit-taking on the strong dollar trend we saw this week,” said Greg Moore, currency strategist, at TD Securities in Toronto.

“There’s a lot of uncertainty going into the meeting and some are talking about a small taper next week, although that is not our view. We still think the Fed will wait until January to make any announcement.”

In early New York trading, the dollar fell 0.2 percent to 103.17 yen, after hitting 103.92 in Asian trading, its highest level since October 2008. Traders said there are bids in the 103-yen area and if that goes, there could be more selling of some short-term longs ahead of the weekend.

On the week, the dollar posted minor gains of just 0.2 percent, on track for its best weekly performance since early November.

Marshall Gittler, head of global FX strategy at IronFX Global, who thinks the Fed will begin tapering next week, said he expects dollar/yen to reach 130 yen by the end of next year as Japan’s economic struggles come to the fore.

Other than against the yen, the dollar was generally steady versus other currencies. It was slightly higher against the euro at $1.3732 and was up 0.5 percent versus sterling, which last traded at $1.6274.

The euro also hit a five-year peak against the yen at 142.81, but was last down 0.4 percent at 141.64 yen.

So far this year the dollar has gained 19 percent against the yen while the euro has risen 24 percent, on expectations the Bank of Japan will provide even more stimulus next year.

The euro in general has been resilient despite recent poor economic data, as two-year swap rates rose to their highest levels in a month. The European Central Bank said on Friday that banks will return 22.65 billion euros of crisis loans to it next week, above analysts’ forecasts, tightening liquidity in the bloc.

Citi strategist Valentin Marinov said this can help push the euro higher for now, but it isn’t positive for the euro longer-term as tightening liquidity hits lending and growth.

Liquidity usually tightens towards the end of the year, when banks hold off from lending to each other.

YEN RECOVERS

The yen earlier slumped to a three-decade low against the Swiss franc, with some attributing the broad-based decline to a resumption of its role as a conduit for carry trades given the Japanese central bank’s continued commitment to an ultra-easy monetary policy.

The franc has been buoyed by Swiss banks repatriating money before the year-end. The Swiss franc rose to 116.68 yen, its highest level since early 1983 in Asian trading. But in the New York session, the Swiss franc has retraced its gains to trade 0.3 percent lower to 115.90 yen.

The Australian dollar fell to its lowest in more than three months after central bank governor Glenn Stevens said he would prefer to see the local dollar lower as a boost to trade-exposed sectors of the economy. It was recently flat at US$0.8931.

 

 Wholesale prices in the U.S. declined for a third month in November, reflecting lower costs for energy and cars.

The 0.1 percent drop in the producer-price index followed a 0.2 percent decrease the prior month, a Labor Department report showed today inWashington. The median estimate in a Bloomberg survey of 77 economists called for no change. The so-called core measure, which excludes food and energy, rose 0.1 percent.

Prices of goods and materials used in the earlier stages of production fell for a second month as slow improvement in global markets limits demand. Scant signs of accelerating inflation indicate Federal Reserve policy makers meeting next week have more room to maintain their unprecedented $85 billion in monthly asset purchases in order to help spur the expansion.

“Inflation remains quite tame,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, who correctly projected the drop in prices. “Over the course of the next year, the core numbers will drift up a little bit as the economy remains healthy and unemployment keeps falling.”

Estimates for the change in wholesale prices in the Bloomberg survey ranged from a drop of 0.3 percent to a gain of 0.5 percent.

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